Insights: Paper Industry

More than a third of the timber cut in the United States each year is processed into paper and paper products. Pulp logs are shipped to a mill where they are converted into chips. Sometimes the logs are chipped in the field and shipped to the mill in chip form. At the pulp mill, wood chips are converted by mechanical and chemical processes into wood pulp,
the basic ingredient of paper. Wood pulp is then subjected to a series of mechanical and thermal processes to manufacture paper or paperboard. These intermediates are then converted into a wide variety of products, including printing and packaging paper, containers and bags, and construction materials. Two types of products, printing paper
(including newsprint) and paperboard containers account for most of the output of the paper industry.

Virtually everything that is produced, marketed, or sold is packaged in paper. Manufacturing control processes typically have required a huge volume of paper in the form of order forms, packing slips, and management reports. Product marketing is dependent on a mountain of paper including newspaper and magazine advertising, direct mail, promotional flyers, store displays, and so forth.

More importantly, everything that is shipped is packaged, and packaging materials consume enormous amounts of paper in the form of boxes, bags, padding and cushioning, wrapping, and labels. This ubiquity of paper and paper products in manufacturing and marketing means that demand for paper should, to some degree, follow the output of the manufacturing sector.

Historical Context 
U.S. pulp and paper output has been declining since the late nineties. Major production declines during the 2000 – 2001 recession were never recovered. The industry has been plagued by many of the same problems that overtook the steel industry in the eighties and nineties. Competition from foreign markets has increased. Plastic materials have replaced paper in many packaging and shipping applications. Growth of the internet, and of electronic communications in general, have had a negative impact on the demand for paper as a communications medium. Domestic producers have not kept up with their foreign competitors in embracing new production technologies, although they are catching up. Like the steel industry, the paper industry is engaged in an ongoing program of reorganization, downsizing, and consolidation to meet the challenges of technological change and foreign competition.

Recent History
Although paper production had been declining since the late nineties, output fell off sharply during the Great Recession, declining nearly 18% in 2008. Over the next four years, less than half of these losses were regained, but output had been declined for the last seven years before the pandemic. Production declined between March and May of
2020 by about 10%. Output had largely recovered by the middle of 2021, but production is still not back to pre-pandemic levels.

The continuing decline of newspaper publishing has been a drag on paper production. After years of annual 3% declines, the industry dropped more than
18% in 2008 alone. Since the 2008 recession, uniform declines have continued. Newspaper publishing is currently running at less than 20% of the peak output attained in the late eighties as more and more newspapers are switching to an online-only model or ceasing publication entirely. Newsprint production has been declining for twenty years, and the declines have been accelerating for the last two or three years.

Exports
The U.S. is a net exporter of pulp, paper, and paper products. For a brief period from 1999 through 2002, imports very nearly equaled exports, but, since the 2008 recession, exports have been just about twice as large as imports. From 2002 through 2011, the quantity of net exports grew steadily but the value has stabilized in the last ten years. Exports and imports have both declined since the middle of 2018.

Outlook
Newsprint once constituted a significant portion of paper output in the U.S., but demand has declined to the vanishing point in the last few years. Simultaneous growth in e-commerce, with a consequent rise in the demand for delivery packaging, has balanced this trend. Pulp and paper output has remained relatively constant in spite of slowly decreasing net exports and the increased use of plastics in packaging. We expect this situation to continue for the near future, with slow but stable growth for the next few years.

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